December 20, 2021
It was another highly volatile week in which the December FOMC meeting was the central focus. As widely expected, the Fed announced that they would double the pace of tapering asset purchases, now on pace to finish by March rather than June. What was not widely expected, however, was the Committee’s collective expectation for future rate hikes. They released their latest “dot plot,” which showed three 25-basis point rate hikes in 2022, up from the (mostly) consensus expectation of two hikes expected in the new dot plot. Despite the additional hike expected for next year, bond yields moved lower on the week, declining by 7-8 basis points for 3- to 10-year Treasurys. Some of the moves in bond yields have likely been at least partially due to the possibility of the Omicron variant slowing economic growth, but given the fact that 10-year Treasurys have struggled to hold the 1.50% level, the bond market does not seem to believe that the Fed will be able to raise rates as to the point that they are calling for now, despite inflation running well above their 2.0% target.
Agency bullet spreads were little changed except for 10-year terms, which widened on the week. Callable spreads were mixed last week, with shorter tenors tightening while longer maturities widened. This week and next will likely be relatively quiet, particularly with the Christmas holiday at the end of the week. The only real meaningful economic data is scheduled for Thursday, when the market will get the latest releases on personal income, PCE inflation, durable goods orders, and the University of Michigan confidence index. A lot of data for an early-close Thursday.
Spreads on agency bullets were mostly unchanged out to 5-year terms, but 10-year bullets widened on the week by 3 basis points. Bullets with 10-year terms now trade at approximately 18 basis point spread to Treasurys, their widest level in one full year. Keep in mind, 10-year bullets traded as tight as 5-basis point spreads to Treasurys as recently as this summer. Similarly, 5-year bullets now trade at spreads of 4 basis points, their widest levels since January. Last week callables tightened on the front end of the curve, with spreads narrowing by 1-2 basis points out to 5-year terms, while 10- and 15-year tenors widened by 3-5 basis points.
The following table reflects last week’s total issuance and call activity across the primary GSE issuers. Total issuance nearly doubled to $5.8 billion and call volume increased marginally to $294 million last week. For specific call dates and amounts for individual bond portfolios, be sure to log in to the Client Portal on the Vining Sparks website.
Last week the Federal Home Loan Bank passed on its final issuance slot of the year. Freddie Mac has one more issuance date for the year tomorrow, December 21st, but it is not expected to announce a new Reference note.
Senior Vice President, Investment Strategies